Tech, suburban migration fuel Chicago CBD office growth

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The downtown office market saw measured growth in the first quarter of 2015, with vacancy down to 12.7 percent and rent up 4.7 percent. But those numbers alone don’t tell the full story.

“The tech boom and suburban migration are not new phenomena, but both classes of tenants continue to drive leasing momentum,” said JLL Senior Vice President Nooshin Felsenthal. “It all comes back to job growth and companies’ desire to attract top-tier talent.”

Merchandise_Mart

Photo credit: Steve Geer

Here are seven secrets behind downtown’s rising office market and its potential for landlord leverage:

  1. Silicon Prairie: Tech companies and start-ups have accounted for 4.7 million square feet of leases since 2012 and more than 150,000 square feet in Q1. The Chicago tech sector has staying power, according to a recent JLL report, and could double in size with the addition of 40,000 jobs by 2025.
  2. Suburban Exodus: It’s been a while since Sara Lee and Motorola took the plunge, but suburban migration continues to account for a large portion of leases. Suburb-to-city moves have brought 2.1 million square feet of demand to the market since 2012, like Mead Johnson’s recent 75,000 square foot lease at 444 W. Lake.
  3. Confident Consumers: Wages are growing hand-in-hand with employment, showing the sharpest spike since 2008. You can credit office-using sectors like professional business services, information and government for getting unemployment down to 6.4 percent. The unintended consequence? It’s more likely the Fed will raise short-term interest rates in the months ahead.
  4. 87,000 Jobs: The addition of so many jobs in the past 12 months has forced employers to expand their footprints, driving the strongest leasing momentum seen in this cycle. While tenants vacating Class A and C spaces countered 242,000 square feet absorbed in Class B, resulting in near-level absorption of 15,319 square feet, total vacancy has come down 130 basis points in the past 12 months.
  5. Asking Rent Run-Up: Average asking rents in the CBD went up for the fifth consecutive quarter, rising $0.31 PSF to $34.98 PSF. As expected, Class A space in River North, the West Loop and the Central Loop continues to command the highest rents in the CBD.
  6. Tight River North Market: Thanks to tech and creative tenants, River North’s low vacancy led the pack at 7.2 percent. It’s a unique opportunity for some landlords like Vornado, owner of the Merchandise Mart (pictured), which is now marketing 210,000 square feet of former retail space as office space
  7. Expanding Inventory: Office inventory grew for the first time since 2009 with the delivery of 1K Fulton in Fulton Market. Two of the 534,000-square-foot former cold storage facility’s high-profile tenants, Google and SRAM, will take occupancy later this year. Beyond 1K Fulton, there’s still 2.3 million more square feet in the pipeline.

Source: JLL research

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